• Corpus ID: 41906138

Theory of Product Differentiation in the Presence of the Attraction Effect

  title={Theory of Product Differentiation in the Presence of the Attraction Effect},
  author={Efe A. Ok and Pietro Ortoleva and Gil Riella and Gustavo Flausino Coelho and Efeito de Atraç{\~a}o and Teoria da decis{\~a}o and David Schmeidler},
We apply the theoretical model of endogenous reference-dependence of Ok, Ortoleva and Riella (2011) to the theory of vertical product differentiation. We analyze the standard problem of a monopolist who offers a menu of alternatives to consumers of different types, but we allow for agents to exhibit a form of endogenous reference dependence like the attraction effect. We show that the presence of such biases might allow the monopolist to overcome some of the incentive compatibility constraints… 

Figures from this paper

Revealed (P)Reference Theory
This paper develops axiomatically a revealed preference theory of reference-dependent choice behavior. Instead of taking the reference for an agent as exogenously given in the description of a choice
Testing the asymmetric dominance effect and its explanations
The asymmetric dominance effect is one of the most studied topics in the consumer behaviour and marketing literatures. It refers to the situation in which adding an option C to the choice between A
Failing to Choose the Best Price: Theory, Evidence, and Policy
Both the “law of one price” and Bertrand’s (J Savants 67:499–508, 1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In
Compromise, extremism, and guilt
This dissertation is a study of non-standard economic behavior. The first chapter concerns two widely observed violations of Independence of Irrelevant Alternatives, the Compromise and Attraction
The attraction effect and its explanations
  • G. Castillo
  • Computer Science, Mathematics
    Games Econ. Behav.
  • 2020
The attraction effect is found, but in a smaller magnitude than previously thought, and a ‘range effect’ is uncovered that shows that people weight more attributes whose range increases.
Attraction-Effect Heuristics∗
Three decision-making heuristics are considered of which procedures incorporate the Attraction Effect: RIDC incorporates it most strongly and the Exogenous-RDRC incorporates it the least, and axiomatic characterizations of the outcome sets of these heur strategies are provided to help uncover their most salient properties.


Role of product entry and exit on the attraction effect
The attraction effect illustrates a violation of the regularity assumption in consumer choice. This effect increases the share of a target brand, relative to a competitor, when a third alternative is
Nonlinear Pricing with Self-Control Preferences
This paper studies optimal nonlinear pricing for a monopolist when consumers' preferences exhibit temptation and self-control as in Gul and Pesendorfer (2001). Consumers are subject to temptation
The Effects of Attraction on Investment Decisions
The attraction effect occurs when an inferior item changes a decision-maker's perception of the relationship between other available alternatives, contrary to the expectations of rational
Seeking Subjective Dominance in Multidimensional Space: An Explanation of the Asymmetric Dominance Effect
An important example of the influence of context on elicited values and choice is the effect of asymmetrically dominated alternatives, first studied by Huber, Payne, and Puto (1982). A theory of
The robustness of the asymmetrically dominated effect: Buying frames, phantom alternatives, and in‐store purchases
Given a choice set of two alternatives, the addition of a third alternative that is clearly inferior to one of the existing alternatives (but not the other), can result in a shift of preference to
Temptation and Self‐Control
We study a two-period model where ex ante inferior choice may tempt the decision-maker in the second period. Individuals have preferences over sets of alternatives that represent second period
Choice Based on Reasons: The Case of Attraction and Compromise Effects
Building on previous research, this article proposes that choice behavior under preference uncertainty may be easier to explain by assuming that consumers select the alternative supported by the best
Explaining Context Effects on Choice Using a Model of Comparative Judgment
Context effects refer to the shifts in shares when another alternative is introduced in the choice set. The alternative can be asymmetrically dominated, asymmetrically dominating, totally dominated,
Anchored preference relations
It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local non satiation in which all reference-dependent indifference surfaces are smooth.
Changes in consumer choice: Further investigation of similarity and attraction effects
Attraction and substitution effects have been shown to be important determinants of brand choice when a new brand is added to a choice set. A simple framework is proposed for predicting the effect on